Mercantile nations have always employed large funds in overseas trade. But the practice of foreign investment, as we know it now, is a very modern contrivance, a very unstable one, and only suited to peculiar circumstances. An old country can in this way develop a new one at a time when the latter could not possibly do so with its own resources alone; the arrangement may be mutually advantageous, and out of abundant profits the lender may hope to be repaid. But the position cannot be reversed. If European bonds are issued in America on the analogy of the American bonds issued in Europe during the nineteenth century, the analogy will be a false one; because, taken in the aggregate, there is no natural increase, no real sinking fund, out of which they can be repaid. The interest will be furnished out of new loans, so long as these are obtainable, and the financial structure will mount always higher, until it is not worth while to maintain any longer the illusion that it has foundations. The unwillingness of American investors to buy European bonds is based on common sense.
At the end of 1919 I advocated (in The Economic Consequences of the Peace) a reconstruction loan from America to Europe, conditioned, however, on Europeʼs putting her own house in order. In the past two years America, in spite of European complaints to the contrary, has, in fact, made very large loans, much larger than the sum I contemplated, though not mainly in the form of regular, dollar–bond issues. No particular conditions were attached to these loans, and much of the money has been lost. Though wasted in part, they have helped Europe through the critical days of the post–Armistice period. But a continuance of them cannot provide a solution for the existing disequilibrium in the balance of indebtedness.
In part the adjustment may be effected by the United States taking the place hitherto held by England, France, and (on a small scale) Germany in providing capital for those new parts of the world less developed than herself—the British Dominions and South America. The Russian Empire, too, in Europe and Asia, may be regarded as virgin soil, which will at a later date provide a suitable outlet for foreign capital. The American investor will lend more wisely to these countries, on the lines on which British and French investors used to lend to them, than direct to the old countries of Europe. But it is not likely that the whole gap can be bridged thus. Ultimately, and probably soon, there must be a readjustment of the balance of exports and imports. America must buy more and sell less. This is the only alternative to her making to Europe an annual present. Either American prices must rise faster than European (which will be the case if the Federal Reserve Board allows the gold influx to produce its natural consequences), or, failing this, the same result must be brought about by a further depreciation of the European exchanges, until Europe, by inability to buy, has reduced her purchases to articles of necessity. At first the American exporter, unable to scrap all at once the processes of production for export, may meet the situation by lowering his prices; but when these have continued, say for two years, below his cost of production, he will be driven inevitably to curtail or abandon his business.
It is useless for the United States to suppose that an equilibrium position can be reached on the basis of her exporting at least as much as at present, and at the same time restricting her imports by a tariff. Just as the Allies demand vast payments from Germany, and then exercise their ingenuity to prevent her paying them, so the American Administration devises, with one hand, schemes for financing exports, and, with the other, tariffs which will make it as difficult as possible for such credits to be repaid. Great nations can often act with a degree of folly which we should not excuse in an individual.
By the shipment to the United States of all the bullion in the world, and the erection there of a sky–scraping golden calf, a short postponement may be gained. But a point may even come when the United States will refuse gold, yet still demand to be paid,—a new Midas vainly asking more succulent fare than the barren metal of her own contract.
In any case the readjustment will be severe, and injurious to important interests. If, in addition, the United States exacts payment of the Allied debts, the position will be intolerable. If she persevered to the bitter end, scrapped her export industries and diverted to other uses the capital now employed in them, and if her former European associates decided to meet their obligations at whatever cost to themselves, I do not deny that the final result might be to Americaʼs material interest. But the project is utterly chimerical. It will not happen. Nothing is more certain than that America will not pursue such a policy to its conclusion; she will abandon it as soon as she experiences its first consequences. Nor, if she did, would the Allies pay the money. The position is exactly parallel to that of German Reparation. America will not carry through to a conclusion the collection of Allied debt, any more than the Allies will carry through the collection of their present Reparation demands. Neither, in the long run, is serious politics. Nearly all well–informed persons admit this in private conversation. But we live in a curious age when utterances in the press are deliberately designed to be in conformity with the worst–informed, instead of with the best–informed, opinion, because the former is the wider spread; so that for comparatively long periods there can be discrepancies, laughable or monstrous, between the written and the spoken word.
If this is so, it is not good business for America to embitter her relations with Europe, and to disorder her export industries for two years, in pursuance of a policy which she is certain to abandon before it has profited her.
For the benefit of any reader who enjoys an abstract statement, I summarize the argument thus. The equilibrium of international trade is based on a complicated balance between the agriculture and the industries of the different countries of the world, and on a specialization by each in the employment of its labor and its capital. If one country is required to transfer to another without payment great quantities of goods, for which this equilibrium does not allow, the balance is destroyed. Since capital and labor are fixed and organized in certain employments and cannot flow freely into others, the disturbance of the balance is destructive to the utility of the capital and labor thus fixed. The organization, on which the wealth of the modern world so largely depends, suffers injury. In course of time a new organization and a new equilibrium can be established. But if the origin of the disturbance is of temporary duration, the losses from the injury done to organization may outweigh the profit of receiving goods without paying for them. Moreover, since the losses will be concentrated on the capital and labor employed in particular industries, they will provoke an outcry out of proportion to the injury inflicted on the community as a whole.